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FEBRUARY 18, 2002

BUSINESSWEEK INVESTOR

Is Your Broker Leaving You out in the Cold?

The new focus on high-end clients means less service for many

Have you noticed that the stockbroker you used for years hasn't called you lately? It could just be the bear-market blahs, but perhaps not. If your account has been deemed too small--which could be the result of following your broker's advice--the lack of attention may be deliberate. In fact, some of the biggest firms are taking a new approach to smaller accounts. Over the past year, more than 1 million investors with five-figure accounts have been switched to call centers. So teams of brokers now provide the advice clients previously got from one dedicated broker.

Pinched by the market and the recession, brokerages are looking to solutions such as call centers to cut costs and squeeze more profit out of existing customers. "During the bull market, brokerage firms measured success by how many accounts they had," says Bear Stearns financial-services industry analyst Amy Butte. "Now, they focus on the profitability of each account."

This new focus on profitability is likely to mean better service for both the high and low end of the market, while the middle segment is in flux. For those with the smallest accounts, which at Merrill (MER ) means one with assets of $100,000 or less and at Prudential, $25,000 or less, the teams at call centers may offer better service since most brokers never gave these clients much attention anyway. For those with $1 million-plus accounts, competition for this segment of the market is driving fees down. In addition, brokers are beefing up estate planning and other high-end services. It's those with investable assets in the low to high six figures who may notice that while they still rate a broker, that person may not call as often with investing ideas or hand out invitations to swank investment seminars and golf outings. While Merrill and Prudential are leading the call-center trend, in coming years more firms are likely to launch them as well. You're also likely to see higher asset cutoffs for who gets a call center and who gets a broker.

How do you get the attention you think you deserve? If you keep accounts with several brokerage firms, the simplest solution is to consolidate them to boost your clout at one firm. Louis Harvey, president of Dalbar, a financial-services research firm in Boston, says the typical client maintains accounts at three firms. That strategy once gave investors access to a wider array of investment research. "But with the Internet and CNBC, everyone gets the same investment news, so there's no longer a need to have ties with more than one firm," Harvey says.

You'll also wind up paying proportionally less in fees on one big account. Competition from discount brokers and online trading has slashed brokerage commissions. So many big firms are now pushing fee-only accounts in which investors pay a percentage of assets annually, whether they trade or not. Fees are set on a sliding scale based on account size. Steve Liguori, head of retail marketing at Morgan Stanley (MWD ), says less than 20% of the firm's clients have fee-based accounts, but they are the fastest-growing segment of its retail business. In Morgan Stanley's Choice program, investors pay annual fees ranging from 0.3% to 2.25% of assets. In Merrill's Unlimited Advantage program, investors pay 1.5% of assets for the first $1 million of a stock portfolio, 1% of the next $4 million, and 0.75% of the next $5 million.

Another option is to move your money to a "regional" brokerage where smaller accounts still merit lots of personalized service. Wall Streeters call these firms regionals because they're not based in New York. Nevertheless, their reach can be broad. A.G. Edwards in St. Louis employs 7,351 brokers in 701 branches nationwide. Edward Jones, also based in St. Louis, has 7,507 offices nationwide, nearly all of them one-person operations. Charleston, S.C., and its suburbs, for example, have 36 such offices.

Financial planners can provide the kind of hand-holding you may have once received from your broker. A planner is a good choice if you want to map out an overall investment plan and select a portfolio of mutual funds. Active stock traders may want to stay with a large brokerage firm because of its equity research and wide array of sophisticated products.

For larger accounts, financial planners generally work for a fee rather than a commission. If you have $1 million, a seasoned planner will charge about 1% of assets annually for investment management. If you have $100,000 to $500,000, expect to pay up to 2% of assets. For investors with smaller accounts, it makes more sense to hire a planner on an hourly basis. About half of all planners let clients pay this way, typically charging $100 to $200 an hour. One group that offers hourly rates is Garrett Planning Network, which has 90 planners around the country. The firm's Web site, www.garrettplanningnetwork.com, provides a list of planners by location.

Another alternative: former "discount brokers" such as Charles Schwab (SCH ) or Fidelity Brokerage Services. Sure, these firms largely deal with clients through call centers and on the Internet, but they also have scores of offices where investors can do business face to face. At Schwab, for instance, investors can usually see the same financial consultant at their local branch office if they want to, says Schwab spokesman Greg Gable.

For many customized services, however, it's pay as you go. Schwab charges $400 for a complete analysis of your portfolio holdings and several hours of personal advice through its Portfolio Consultation program. A more detailed financial plan from a Schwab consultant costs $1,000. Schwab can also refer you to its network of 450 independent financial advisers if you have at least $100,000 in assets. At Fidelity, if you have $50,000 or more, the firm will manage a portfolio of mutual funds for an annual fee equal to 1% of your account size.

Bear Stearns's (BSC )Butte expects Schwab and Fidelity to beef up services and products over the next few years by striking deals with Wall Street firms, as Fidelity has done with Lehman Brothers (LEH ). Fidelity customers can tap Lehman's stock research as well as buy shares of initial public offerings the investment bank underwrites.

In the meantime, don't dismiss the call-center approach out of hand. You may get more attention than you were getting before. "You're a big fish at a call center," says Chip Roame, a principal at brokerage consulting firm Tiburon Strategic Advisors in Tiburon, Calif.

To make its call center less impersonal, Merrill Lynch assigns a team of seven brokers--several of whom have expertise in different areas--to an investor whose account is in the $50,000 to $100,000 range. If you're in this category, you can call the team directly and request the member who has the particular expertise you need, such as college-savings programs or retirement plans.

Clients with less than $50,000 talk to whichever team happens to be on duty. But Andy Sieg, head of Merrill's Financial Advisory Center, says the broker who answers the phone has access to a computerized log of past calls, allowing for some continuity. In addition, clients with at least $20,000 get two unsolicited calls a year from a broker to review their investment portfolio. "It's a very comfortable process," says Todd Ottenstein, 42, an entrepreneur who lives in Arlington, Va. Ottenstein says he checks in about once a week with Merrill call-center broker John Ellis to discuss stocks and other investing topics. The Financial Advisory Center employs more than 300 brokers in Jacksonville, Fla., and Hopewell, N.J., who field more than 5,000 calls around the clock each day.

At Merrill, you don't automatically leave the call center and get your own broker if your account jumps above $100,000. Sieg says that if your investing needs remain simple even as your account balance grows, you might stay at the call center. At Prudential, on the other hand, you have the option of going back to a broker when your account balance rises above $25,000.

Sure, it's nice to have a local broker who knows to ask about your kid's Little League team. But in the end, it's more important to have access to the advice and services you need when you need them--even if your account isn't in the major leagues.

By Susan Scherreik

Please note: Investor's Capital Management, LLC is a member of the Garrett Planning Network